The meaning of Portfolio varies by context. This article focuses on the meaning, role, and importance of the term Portfolio in the business context.
What is the meaning of a Portfolio?
Simply put, a Portfolio is a collection of different types of the same thing. It can contain investments, stocks, bonds, projects, initiatives, products, brands, companies, clients, and just about anything.
Portfolios are used to manage investments in assets, projects, companies, etc. The objective of creating a portfolio is to maximize the value of an investment. A portfolio follows the edict "the whole is greater than the sum of its parts" i.e. the collection creates more value than the sum of value created through its contents.
Let us take the example of a financial portfolio to understand the importance of a portfolio. A typical financial portfolio contains different financial instruments such as cash, commodities, stocks, bonds, ETFs, etc. Each instrument produces a different rate of return with some performing better than others at a given point in time. So, why not pick the instruments that produce the highest rate of return? Because for three reasons. One, an operating environment is dynamic and unpredictable. Two, investment returns are time-dependent. Three, investments are often countervailing i.e. factors that drive up the value of one investment might drive down the value of another. So, at any given point in time, one investment can offset the losses of another to improve the returns of the entire collection. The trick is to pick the right set of investments so your gains always beat out your losses. Portfolio management is a continuous process that makes sure the portfolio contains the right mix of investments.
In business, portfolios are key governance.
- Return on Investment (ROI)
- IT Investment (Information Technology Investment)
- IT Governance
- Project Life Cycle
- Project Portfolio Management (PPM)
- Project Portfolio Rationalization